Agnikalam: Is 25% of GDP from manufacturing robust policy?

Govt should instead identify areas where bulk of labour supply and need for economic infrastructure match

The present government has, after the last, once again asked for manufacturing to reach 25 per cent of gross domestic product (GDP). This must be a genuine desire for pre-eminence as a manufacturing hub among emerging economies. Visuals - cross section and time series - are helpful in analysing this. To begin, it is essential to differentiate between manufacturing and industry. Figure 1 shows that in both Brazil and India, industry accounts for 25 per cent of GDP. Of this 13 per cent is manufacturing - or about half (Figure 2). In China by contrast, they are 44 per cent and 32 per cent respectively. It implies that, not only are China's industry and manufacturing in relation to GDP much higher, but manufacturing comprises a much higher proportion - 70 per cent - of industry. And, reflecting the vast difference in the GDPs of China and India (see last month's Agnikalam), the value difference in the size of manufacturing in the two countries is enormous.

Thus, unlike the growing difference in the size of their GDPs since the 1980s, note that the Figures also reveal that China's relative size of industry in GDP (around 45 per cent) has always been far higher than India's (around 25 per cent), and both have continued without much change. Brazil's industry, on the other hand, fell drastically, from 45 per cent to 25 per cent. Usually, as economies develop and grow, industry and manufacturing become increasingly specialised while services grow faster and become larger. This is what occurred in Brazil. But China steadfastly maintained its high octane grip on industry and manufacturing reflecting a deliberately designed policy even as its GDP was growing by leaps and bounds. Few countries including India can replicate this in reflection of their particular socio-economic attributes and administrative practices. Indeed, India's manufacturing sector has shown little sign of increased share of GDP as is amply evident from Figure 2.

It has been impossible for India to eradicate impediments - policy and administrative - at all levels of government to enable manufacturing growth. Is government resolute to defang obstacles? Is it spending time to get into the nitty gritty of laws, rules and regulations - tax and non-tax - by muddying its fingers and not leaving them in the hands of the same bureaucracy that so far has designed and implemented those obstructionist characteristics and practices? If rapidly re-emerging industry discomfort is a signal, speed of removal of impediments remains of the essence.

Yet, other sectors should not be neglected. Figure 3 shows the secular decline of agriculture in GDP in India, similar to China. But the contrast is that China made up the decline through industry and manufacturing growth, a substitution quintessential for employment generation. Also, given the pressure of India's poor rural population, the need for agriculture cannot be sourced to a comparable extent from abroad. Returning to employment, only organised sector employment can assure social sector expenditure on labour as in China. Even Brazil's rapid decline in industry and manufacturing in GDP has been countered through social expenditure earmarked from additional taxes on companies' value added. India has failed miserably in its socio-economic services for the vulnerable since it has not achieved organised manufacturing or industry growth in terms of GDP. Yet, the socio-economic stability of rural life has been adversely affected, resulting in a rural-to-urban influx huddled in slums of A, B or C category cities. The government needs to design urgently a resurgent policy for two-thirds of India's population - our rural relatives.

If agriculture's relative status is not to worsen further, then raising manufacturing to 25 per cent would need services to decline by 10-12 per cent of GDP. Figure 4 indicates that, interestingly, the "rate" of growth of services in China has been no less than that of India, though China's services share in GDP is much lower. This is not surprising given, respectively, China's marathon towards high speed GDP growth, and that chunks of India's services share could be considered a residual. It has been demonstrated in Oxford Review of Economic Policy (Autumn 2012) that India has comparative advantage in international trade in services together with the United States in contrast to say China or Germany which have comparative advantage in goods. This implies that India should open its services - retail, banking, insurance - to global markets as has the United States, and not protect it or subsidise it further. Tax incentives allowed segments of services such as information technology exports to grow while it brought some employment to the urban middle class. Setting the past aside, it is time for services to perform at potential in a global environment without the crutches of domestic incentives.

Summing up, rather than pick out a number - 25 per cent of GDP - for manufacturing, if the government is seriously focused on generating employment for India's burgeoning labour force at the macro-economic level, it has to identify those spots where the bulk of labour supply, and the need for economic infrastructure, match. This is in construction - highways, roads, dams, low cost and middle income housing, single to three star hotels - manufacturing - not merely small scale, but all labour-intensive areas that require various skill levels including basic skills - agriculture - through the construction of irrigation works and water resource management - and power and electricity generation - through nuclear plants and solar panels whose construction ensures labour utilisation. The objectives should be employment, social-economic enhancement, and economic wellbeing. It is immaterial if 25 per cent of GDP in manufacturing remains wishful thinking.

Luckily, this is a propitious moment to begin the long march in light of favourable international oil prices, domestic prices reasonably under control, and India's cushion against any re-emergence of global economic recession or commodity price volatility since India is less dependent than China on international demand. For success, Indian policymakers must put in place fresh processes with experts, not administrators, at the helm. Embedding expertise is not a new recipe, but would simply follow what China is doing for quite some time and what has always been the basis of Brazilian policy making.